Earnings Preview: Rockwell Collins

Rockwell Collins Inc. (NYSE:COL - News), the supplier of avionics and military equipment, announced that it would release its results for the first quarter of 2012 ending on December 31, 2011, before the market opens on January 19, 2012.

Earlier, Rockwell in the fourth quarter of 2011 ending on September 30, 2011, reported adjusted earnings per share of $1.02 per share short of the Zacks Consensus Estimate of $1.14. However, results comfortably beat the year-ago quarterly earnings per share of $0.93.

With respect to earnings surprises, the company was behind the Zacks Consensus Estimate in the trailing two quarters. However, Rockwell was in-line with the Zacks Consensus Estimate for the quarter ending on March 31, 2011. This is reflected in the average earnings surprise of -1.02%, with negative surprises in two quarters and positive in two.

Last Quarterly Review

Rockwell Collins’ total sales in the fourth quarter of 2011 ending on September 30, 2011, was $1.3 billion short of the Zacks Consensus Estimate by $18 million. However, it exceeded the year-ago figure of $1.27 billion.

The top-line was driven by an increase in Commercial Systems sales offset by a lackluster Government Systems performance. Total quarterly segment operating earnings were $271 million, up 9.3% year over year. Overall, Rockwell Collins reported a net income of $175 million, an increase of $25 million year over year.

Commercial Systems: Commercial Systems sales were up $44 million to $517 million in the reported quarter, compared with $473 million in the year-ago quarter.

By product category, sales related to aircraft original equipment manufacturers increased $37 million to $268 million year over year driven by higher product deliveries for the Bombardier Global platform and increased sales of avionics to air transport OEMs resulting from higher aircraft production rates.

Aftermarket sales increased $6 million to $214 million year over year primarily driven by increased service and support sales. However, this was partially offset by the absence of Project Liberty spares delivered in fourth quarter 2010.

Government Systems: Government Systems sales fell $19 million year over year to $779 million in the fourth quarter 2011.

By product category, Avionics sales increased $4.0 million year over year to $414 million on the back of KC-46A tanker and the E-6 aircraft upgrade programs, partly offset by the completion of deliveries for the KC-135 GATM program. Communication product sales declined by $14 million to $188 million due to the completion of deliveries last year for two satellite communication upgrade programs.

Surface solutions sales increased $2 million to $97 million as a result of increased deliveries of public safety vehicle systems and increased revenue for the Common Range Integrated Instrumentation System program, partially offset by two programs terminated for convenience in the third quarter. Sales of Navigation products decreased by $11 million to $80 million due to fewer deliveries of Defense Advanced GPS Receiver products.

Agreement of Estimate Revisions

For the quarter ending on December 31, 2011, 1 out of 17 analysts covering the stock have made a downward revision in the last 30 days and none made any downward revision in the last 7 days. None of the analysts have made any upward revision in the last 30 days.

Magnitude of Estimate Revisions

For the quarter ending on December 31, 2011, estimate was 87 cents per share in the last 30 days and inched down by one penny to 86 cents per share owing to the lone downward revision. The Zacks Consensus Estimate for the aforementioned quarter is 9.99%, down from the year-ago quarter.

Our Take

Rockwell Collins is a leading global provider of communication and aviation electronic solutions for commercial and government customers. Its aircraft electronics are installed in business as well as commercial aircraft cockpits and cabins of nearly every airline in the world. Additionally, its airborne and ground-based communication systems transmit approximately 70% of all U.S. and allied military airborne communications.

Rockwell Collins expects that the balance and diversity of its business will likely enable continued revenue growth for fiscal-year 2012 driven by the strength of commercial markets. It also expects to realize additional operating margin expansion, cash flow generation aligned with long-term goals, and earnings per share growth at more than three times the rate of sales growth.

We however expect the quarter ending on December 31, 2011, would be a slow quarter. Performance would be down in the Government Systems segment and will only improve in the second half of the ongoing fiscal. The downcast view comes on the heels of the cancellation of three programs in 2011 and lower sales of Defense Advanced GPS Receiver program.

In the near term, we expect the saving grace for the company to be the Commercial Systems segment and ongoing share repurchase program. To fuel the growth in EPS the company issued $250 million of Notes in December to fund its share repurchase program.

Currently, Rockwell has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term (6 months) Neutral recommendation. This is in-line with its peers like AeroVironment Inc. (AVAV'>AVAV) and AlliantTechsystems Inc. (ATK'>ATK).